The Economics of Content Protection

In a model that allows smooth substitution between domestic and imported inputs, content protection distorts inout choice but does not force a divergence between price and unit production cost. Content protection biases gains intechnical efficiency away from those saving domestic input and toward those saving imported input. By increasing derived demand for the domestic input,a marginally effective content requirement benefits suppliers of this input. Increases in the content requirement above the marginally effective level increase such benefits to suppliers of the domestic input provided that the price elasticity of demand for the final product is less than a critical value. The consequences of content protection are not materially affected by monopoly in the domestic final product market or monopsony in the domestic input market unless such monopoly or monopsony are created by content protection. The situation of a monopolistic supplier of the domestic input is enhanced by content protection.